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Consumer Discretionary Sector Presentation
May 5, 2009
Diego Benavente, Matt Berkowitz, Conrad Bowman, Julie McGrover
Agenda
Sector Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Top 5 - 12 Month Returns
Industry 1 mth 3 mths 6 mths 12 mths 5 yrs IncludesCASINOS & GAMING 7.7% 15.9% 15.0% 3.2% 27.5% Intl Game Technology, Wynn Resorts LtdRESTAURANTS 20.4% 33.2% 32.3% -4.2% 8.3% Darden Restaurants, McDonald's, Starbucks, Yum! BrandsSPECIALTY STORES 22.0% 54.5% 36.6% -6.8% -3.7% Office Depot Inc, Staples, Tiffany & CoPUBLISHING 15.3% 21.2% 4.8% -13.2% -5.0% Gannett Co, Meredith, McGraw-Hill, NY Times, Washington PostMOVIES & ENTMT 35.2% 27.6% 21.9% -13.5% 7.8% Walt Disney, News Corporation, Time Warner, Viacom Inc
Bottom 5 - 12 Month ReturnsIndustry
Industry 1 mth 3 mths 6 mths 12 mths 5 yrsEDUCATION SERVICES 97.7% 19.9% -28.1% -79.6% -85.0% Apollo Group IncRETAIL-INTERNET 14.4% -4.8% -20.2% -67.8% -78.0% Amazon.com Inc, ExpediaHOMEFURNISHING RETL 83.3% 24.0% -24.2% -65.8% -68.0% Bed Bath & Beyond IncBROADCASTING 30.0% -42.3% -45.1% -61.6% - CBS Corp BAUTOMOTIVE RETAIL 41.4% 2.7% -30.6% -54.9% -37.0% AutoNation Inc, AutoZone, O'Reilly Automotive
Total Return % Change
Total Return % Change
Business Analysis – Sector Composition
Industries within Consumer Discretionary Sector: source: Baseline
ADVERTISING CASINOS & GAMING GENERAL MERCHANDISE LEISURE PRODUCTS RETAIL-APPARELAPPAREL & ACCESSORY CONSUMER ELECTRONICS HOMEBUILDING MOTORCYCLE MFRS RETAIL-COMP/ELECTRNAUTO PARTS & EQUIP DEPARTMENT STORES HOMEFURNISHING RETL MOVIES & ENTMT RETAIL-HOME IMPROVEAUTOMOBILE MFRS DISTRIBUTORS HOTEL/RESORT/CRUISE PHOTOGRAPHIC PRODS SPECIAL CONSM SERVAUTOMOTIVE RETAIL EDUCATION SERVICES HOUSEHOLD APPLIANCES PUBLISHING SPECIALTY STORESBROADCASTING FOOTWEAR HOUSEWARES & SPECS RESTAURANTS TIRES & RUBBERCABLE & SATELLITE
Business Analysis – 5 Forces
• Barriers to Entry: High– Many well established companies with strong brand recognition
• Competition: High– Companies have to keep evolving to stay current and keep/gain
market share
• Substitution: High– Consumers can trade up, down, sideways
• Supplier Power: Varied depending on industry
• Buyer Power: High
Business Analysis – Current Economic Conditions
• Positive Factors– Consumers' cash savings continue
to expand and are now at a record level
– More than 60% of homeowners have more than 30% equity in their homes
– Mortgage rates have declined
– The recently passed stimulus package includes some modest tax cuts
– The recently launched Term Asset Loan Program (TALF) aims to loosen up consumer lending by unfreezing the securitization market
– Tax refunds are 15% higher than at the same time last year.
• Negative Factors– Margins in the retail space are
diminishing
– The unemployment rate continues to move higher
– Savings rates in the United States have been increasing.
– The credit card delinquency rate continues to move higher.
– Revolving credit limits are being reduced & credit standards remain tight.
– Personal net worth has declined
– Delinquency rates for prime mortgage loans continue to rise
Schwab Sector Views by Brad Sorensen
Economic Analysis
•Same Time Period•Negatively Correlated
•Brent Crude Oil•CPI
•Positively Correlated:•S&P500 Price Index
•One Month LagPositively Correlated:
S&P500 Price IndexRetail Sales
•One Month Lead•Negatively Correlated
•Brent Crude Oil Spot Price•CPI
•Positively Correlated•S&P500 Price Index
•3 Month LagNegatively Correlated:
Consumer SpendingPositively Correlated
Federal Funds Rate
Valuation Analysis:P/E
+ 10 Cos with negative earnings
(12%)
+ 11 Cos with negative earnings
(14%)
Only 23 Cos are expected to improve their earnings in the
next 4Qs (28%)
Earnings Latest 4 Qs
GENERAL MOTORS -28.83CENTEX -15.66KB HOME -9.88HORTON (D.R.) -8.12PULTE HOMES -5.82FORD MOTOR -4.05LENNAR CL A -2.45GOODYEAR TIRE -1.28EASTMAN KODAK -0.94OFFICE DEPOT -0.60
Trailing P/E by Industry
•GM, Ford•Centex, Horton, KB Home, Lennar, Pulte•Eastman Kodak•Goodyear
•Harman Int’l•Amazon.com(54), Expedia (11)
•Best Buy•GameStop
•McDonalds
•Comcast
Market cap vs Earnings
GM: $ -17.6 BFord: $ -11.6 B
Industry Mkt Cap EarningsTIRES & RUBBER 0.3% -1.5%PHOTOGRAPHIC PRODS 0.1% -1.2%HOMEBUILDING 1.5% -34.4%AUTOMOBILE MFRS 2.3% -137.4%BROADCASTING 0.6% 5.1%MOTORCYCLE MFRS 0.7% 2.9%PUBLISHING 2.1% 8.8%HOUSEHOLD APPLIANCES 1.4% 5.7%MOVIES & ENTMT 12.6% 52.8%HOUSEWARES & SPECS 1.1% 4.2%HOTEL/RESORT/CRUISE 3.9% 14.5%SPECIAL CONSM SERV 0.7% 2.4%ADVERTISING 1.6% 5.4%APPAREL & ACCESSORY 2.5% 7.8%RETAIL-APPAREL 3.6% 11.4%DISTRIBUTORS 0.7% 2.0%RETAIL-COMP/ELECTRN 2.9% 8.3%CASINOS & GAMING 1.1% 3.1%FOOTWEAR 3.2% 8.7%LEISURE PRODUCTS 1.1% 3.0%RETAIL-HOME IMPROVE 10.5% 26.5%CABLE & SATELLITE 10.8% 27.4%GENERAL MERCHANDISE 4.8% 12.1%DEPARTMENT STORES 4.9% 12.2%AUTO PARTS & EQUIP 1.4% 3.5%RESTAURANTS 11.4% 26.8%HOME FURNISHINGS 0.3% 0.6%AUTOMOTIVE RETAIL 2.3% 4.8%EDUCATION SERVICES 1.3% 2.6%SPECIALTY STORES 2.4% 4.9%HOMEFURNISHING RETL 1.0% 2.0%RETAIL-INTERNET 4.9% 4.7%CONSUMER ELECTRONICS 0.1% 0.0%CnDisc Total 100% 100%
INDUSTRY Mkt Cap # Cos Trailing Fwd Trailing FwdADVERTISING 12,767 2 1.46 1.24 11.13 13.03APPAREL & ACCESSORY 19,730 3 3.14 2.75 11.84 13.53AUTO PARTS & EQUIP 11,296 1 1.25 0.79 15.21 24.06AUTOMOBILE MFRS 18,298 2 -8.40 -6.42 -0.63 -0.82AUTOMOTIVE RETAIL 17,937 3 2.76 3.01 17.62 16.14BROADCASTING 4,781 1 1.60 0.77 4.40 9.14CABLE & SATELLITE 85,546 4 1.32 1.32 14.68 14.66CASINOS & GAMING 8,419 2 1.58 0.68 12.75 29.78CONSUMER ELECTRONICS 1,065 1 0.17 -0.77 106.95 -23.61DEPARTMENT STORES 38,886 5 2.01 1.06 15.04 28.62DISTRIBUTORS 5,415 1 2.73 2.39 12.44 14.21EDUCATION SERVICES 10,043 1 3.49 4.36 18.04 14.44FOOTWEAR 25,399 1 3.80 3.61 13.81 14.53GENERAL MERCHANDISE 37,974 3 2.63 2.38 14.79 16.35HOME FURNISHINGS 2,252 1 0.88 0.65 16.31 22.09HOMEBUILDING 11,653 5 -7.69 -1.79 -1.60 -6.87HOMEFURNISHING RETL 7,901 1 1.65 1.58 18.44 19.25HOTEL/RESORT/CRUISE 30,932 4 2.31 1.57 10.01 14.80HOUSEHOLD APPLIANCES 10,694 4 4.47 2.63 8.87 15.03HOUSEWARES & SPECS 8,799 2 2.08 1.47 9.88 14.05LEISURE PRODUCTS 9,076 2 1.28 1.47 14.24 12.41MOTORCYCLE MFRS 5,176 1 2.68 1.33 8.27 16.66MOVIES & ENTMT 100,016 4 1.79 1.37 8.91 11.68PHOTOGRAPHIC PRODS 818 1 -0.94 -0.51 -3.24 -5.98PUBLISHING 16,211 5 2.52 0.83 8.67 26.40RESTAURANTS 90,370 4 2.33 2.51 15.89 14.70RETAIL-APPAREL 28,659 4 1.58 1.25 11.87 14.95RETAIL-COMP/ELECTRN 22,567 3 2.52 2.53 12.73 12.69RETAIL-HOME IMPROVE 82,775 3 1.72 1.30 14.68 19.41RETAIL-INTERNET 38,421 2 1.39 1.40 38.68 38.30SPECIAL CONSM SERV 5,143 1 1.51 1.47 10.03 10.30SPECIALTY STORES 18,985 3 0.94 0.85 18.22 20.08TIRES & RUBBER 2,652 1 -1.28 0.00 -8.58 0.00CnDisc Total 790,656 81 37.2 33.4
Earnings P/EPer Share 2009
P/E (w/o Auto Mfrs & Homebuilders):
13.4 16.2S&P500:
13.2 15.5
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